Should U.S. regulators block the Cypress/Infineon deal on national security grounds, China could respond by blocking M&A transactions involving U.S. acquirers.

Regulatory opposition to Infineon's $8.7 billion deal to buy Cypress Semiconductor (CY) introduces a fresh dose of uncertainty for the chip industry at a time when it's already dealing with a very different kind of uncertainty.

Cypress closed down 14.7% on Friday after Bloomberg reported that the Committee on Foreign Investment in the United States (CFIUS) has recommended that the Trump Administration block its sale to Infineon (a German chip developer) on national security grounds.

Bloomberg said it wasn't clear why CFIUS, which tends to closely scrutinize M&A transactions for potential Chinese access to U.S. technology, has issues with Cypress/Infineon (just maybe, Germany's reluctance to ban Huawei's gear from the country's 5G networks is a factor here). While the lion's share of Cypress' revenue comes from automotive, industrial and consumer electronics end-markets, the company does sell memory chips and some other products to defense and aerospace clients.

It's possible that regulators ultimately approve Cypress/Infineon, perhaps following some asset sales and/or commitments not to sell certain products to Chinese clients -- certainly, the fact that Infineon isn't looking to buy Cypress for its defense/aerospace business helps out. But in the event that they don't, the rejection will cast a pall over the chip M&A landscape, following several months of improved sentiment amid easing trade tensions.

Bloomberg's Cypress/Infineon report explains why Mellanox Technologies (MLNX) fell 1.8% on Friday to $116.15, leaving it $8.75 below the price for Nvidia's (NVDA) all-cash, $6.9 billion deal to acquire the company. Last month, Mellanox had gotten within $2 of the buyout price after Nvidia declared that talks with Chinese regulators (the only ones to have not yet approved the deal, which was inked in March 2019) are "progressing" and forecast that the deal would close within the first half of 2020.

If Cypress/Infineon gets blocked, it wouldn't be shocking to see China respond by refusing to approve Nvidia/Mellanox, just as it refused to approve Qualcomm's (QCOM) deal to buy NXP Semiconductors (NXPI) after the Trump Administration blocked Broadcom's (AVGO) hostile bid for Qualcomm. And that in turn would likely make some other big chip developers and equipment makers think twice about pulling the trigger on deals.

Even in such a scenario, I'd argue that following their recent selloff, the risk/reward for chip stocks generally looks better for long-term investors than it did within the Nasdaq was closing in on 10,000.

But with that said, having regulatory uncertainty throw a wrench into industry M&A activity definitely isn't the kind of thing that Wall Street wants to see at a time when it continues grappling with the COVID-19 outbreak's impact on both near-term supply chain activity and end-market demand.

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At the time of publication, Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, was long AVGO and NVDA.

Wireless technology name Qualcomm boosted its quarterly dividend by 5% in March and is poised to benefit from 5G.

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